Generate QR code
Open Access
Subscription Access
The house that Keynes built: Redecorating and overhaul of the monetary policy model
https://doi.org/10.32609/0042-8736-2023-7-35-49
Abstract
The regular economic crisis prompts macroeconomists to revise their models. The monetary policy is no exception. As a result of the “Great Recession” in 2007-2009 and the COVID-19 pandemic in 2020-2021, they were forced to refresh a look at the monetary policy models that define central bank’s shortterm interest rate decisions. The principles of the New Keynesian economics lie behind most modern models of monetary policy. A set of equations based on several theoretical assumptions and simplifications leads to certain model conclusions. An active work to review the New Keynesian models in the 2020s is under way. Key improvements include financial sector modeling; replacing rational expectations with their alternatives, as well as representative economic agents with heterogeneous ones; finding microeconomic foundations for assumptions; and fiscal policy modeling.
References
1. Andreyev M. Y., Polbin A. V. (2019). Studying the financial accelerator effect in a twosector DSGE model for an exportoriented economy. Journal of the New Economic Association, No. 4, pp. 12—49. (In Russian). https://doi.org/10.31737/2221226420194441
2. Novak A., Shulgin A. (2020). Monetary policy in an economy with regional heterogeneity: Approaches based on aggregate and regional information. Bank of Russia Working Paper Series, March. (In Russian).
3. Akerlof G. (2020). Sins of omission and the practice of economics. Journal of Economic Literature, Vol. 58, No. 2, pp. 405—418. https://doi.org/10.1257/jel.20191573
4. Andreyev M. (2020). Adding a fiscal rule into a DSGE model: How much does it change the forecasts? Bank of Russia Working Paper Series, No. 64.
5. Blanchard O. (2018). On the future of macroeconomic models. Oxford Review of Economic Policy, Vol. 34, No. 1—2, pp. 43—54. https://doi.org/10.1093/oxrep/grx045
6. Blanchard O., Galí J. (2007). Real wage rigidities and the New Keynesian model. Journal of Money, Credit and Banking, Vol. 39, No. 1, pp. 35—65. https://doi.org/10.1111/j.15384616.2007.00015.x
7. Bullard J., Singh A. (2008). Worldwide macroeconomic stability and monetary policy rules. Journal of Monetary Economics, Vol. 55, pp. S34—S47. https://doi.org/10.1016/j.jmoneco.2008.07.012
8. Calvo G. (1983). Staggered prices in a utility maximizing framework. Journal of Monetary Economics, Vol. 12, No. 3, pp. 383—398. https://doi.org/10.1016/03043932(83)900600
9. Carare A., de Resende C., Levin A. et al. (2022). Do monetary policy frameworks matter in lowincome countries? IMF Economic Review, October 26. https://doi.org/10.1057/s41308022001891
10. Dobbs R., Lund S., Koller T., Shwayder A. (2013). QE and ultralow interest rates: Distributional effects and risks. McKinsey Global Institute Discussion Paper, November.
11. Fair R. (2020). Some important macro points. Oxford Review of Economic Policy, Vol. 36, No. 3, pp. 556—578. https://doi.org/10.1093/oxrep/graa011
12. Foley D. (2014). Varieties of Keynesianism. International Journal of Political Economy, Vol. 43, No. 1, pp. 4—19. https://doi.org/10.2753/IJP08911916430101
13. Galí J. (2008). Monetary policy, inflation, and the business cycle: An introduction to the New Keynesian framework. Princeton, NJ: Princeton University Press.
14. Galí J. (2018). The state of New Keynesian economics: A partial assessment. Journal of Economic Perspectives, Vol. 32, No. 3, pp. 87—112. https://doi.org/10.1257/jep.32.3.87
15. Goodfriend M., King R. (1997). The New Neoclassical synthesis and the role of monetary policy. NBER Macroeconomics Annual, Vol. 12, pp. 218—283. https://doi.org/10.1086/654336
16. Kydland F., Prescott E. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, Vol. 85, No. 3, pp. 473—490. https://doi.org/10.1086/260580
17. Lawrence C., Eichenbaum M., Trabandt M. (2018). On DSGE models. Journal of Economic Perspectives, Vol. 32, No. 3, pp. 113—140. https://doi.org/10.1257/jep.32.3.113
18. Lindé J., Smets F., Wouters R. (2016). Challenges for central banks’ macro models. In: J. Taylor, H. Uhlig (eds.). Handbook of macroeconomics, Vol. 2. Elsevier, pp. 2185—2262. https://doi.org/10.1016/bs.hesmac.2016.04.009
19. Martins N., PiresAlves C., de Modenesi A., da Silva Leite K. (2017). The transmission mechanism of monetary policy: Microeconomic aspects of macroeconomic issues. Journal of Post Keynesian Economics, Vol. 40, No. 3, pp. 300—326. https:/ doi.org/10.1080/01603477.2017.1319249
20. Mavroeidis S. (2010). Monetary policy rules and macroeconomic stability: Some new evidence. American Economic Review, Vol. 100, No. 1, pp. 491—503. https:/doi.org/10.1257/aer.100.1.491
21. Muellbauer J. (2020). Implications of householdlevel evidence for policy models: The case of macrofinancial linkages. Oxford Review of Economic Policy, Vol. 36, No. 3, pp. 510—555. https://doi.org/10.1093/oxrep/graa038
22. Roberts J. (1995). New Keynesian economics and the Phillips curve. Journal of Money, Credit and Banking, Vol. 27, No. 4, pp. 975—984. https://doi.org/10.2307/2077783
23. Storm S. (2021). Cordon of conformity: Why DSGE models are not the future of macro economics. International Journal of Political Economy, Vol. 50, No. 2, pp. 77—98. https://doi.org/10.1080/08911916.2021.1929582
24. Svensson L. (2003). What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature, Vol. 41, No. 2, pp. 426—277. https://doi.org/10.1257/.41.2.426
25. Taylor J. (2021). Simple monetary rules: Many strengths and few weaknesses. European Journal of Law and Economics, Vol. 52, pp. 267—283. https://doi.org/10.1007/s10657020096831
26. Vines D., Wills S. (2018). The rebuilding macroeconomic theory project: An analytical assessment. Oxford Review of Economic Policy, Vol. 34, No. 1—2, pp. 1—42. https://doi.org/10.1093/oxrep/grx062
27. Vines D., Wills S. (2020). The rebuilding macroeconomic theory project part II: Multiple equilibria, toy models, and policy models in a new macroeconomic paradigm. Oxford Review of Economic Policy, Vol. 36, No. 3, pp. 427—497. https://doi.org/10.1093/oxrep/graa066
28. Weidmann J. (2019). The role of the central bank in a modern economy — a European perspective. The Speech at the University of South Africa, Pretoria, February 12.
29. Wu J., Zhang J. (2019). A shadow rate New Keynesian model. Journal of Economic Dynamics and Control, Vol. 107, article 103728. https://doi.org/10.1016/j.jedc.2019.103728
Supplementary files
Review
For citations:
Moiseev S.R. The house that Keynes built: Redecorating and overhaul of the monetary policy model. Voprosy Ekonomiki. 2023;(7):35-49. (In Russ.) https://doi.org/10.32609/0042-8736-2023-7-35-49
Views:
848
Email this article 
